EARLY STAGE VENTURE
CAPITAL LIMITED
PARTNERSHIPS (ESVCLPs)
Prepared by AusIndustry – July 2009
ESVCLP Customer Information Guide – April 2015
Page 1 of 31
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ESVCLP Customer Information Guide – April 2015
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© Commonwealth of Australia 2009
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ESVCLP Customer Information Guide – April 2015
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CONTENTS
EARLY STAGE VENTURE CAPITAL LIMITED PARTNERSHIPS
(ESVCLPs) ..................................................................... 1
1.
EARLY STAGE VENTURE CAPITAL LIMITED PARTNERSHIPS (ESVCLP)
OVERVIEW ............................................................................................. 6
2.
REGISTRATION AS AN ESVCLP ......................................................... 6
2.1
Innovation Australia .............................................................................................. 6
2.2
Eligibility criteria [Divisions 9, 11 and 13 VCA] .......................................................... 7
2.3
Applying for registration [Division 11 VCA] ............................................................... 8
2.4
Granting Registration [Division 9, 11 and 13 VCA] ..................................................... 9
2.5
Registration ......................................................................................................... 10
2.6
When registration is in force [s13-1, s13-5 and s13-10 VCA] ..................................... 10
2.7
Maintaining registration [Division 9 VCA] ................................................................. 10
2.8
Revoking registration [Division 17 VCA] .................................................................. 13
2.9
Review of a decision [Division 29 VCA] .................................................................... 14
3.
APPROVED INVESTMENT PLAN ........................................................ 15
3.1
Approving an investment plan [s13-20 VCA] ............................................................ 15
3.2
Variation of an approved investment plan [s13-15 VCA] ............................................ 15
3.3
Operate in accordance with an approved investment plan [s9-3(1)(g),(h) VCA] ........... 16
3.4
Reporting on implementation of an approved investment plan [s15-17 VCA] ............... 16
4.
CAPITAL RAISING AND FUND SIZE .................................................. 16
4.1
Minimum and maximum size [s9-3(1)(d), (4) and (5), VCA] ...................................... 16
4.2
Limit on amount an investor can contribute [9-3(1)(e), 9-3(4),(5), (9-4) VCA] ............ 16
4.3
Committed capital [s118-445 ITAA97] .................................................................... 16
4.4
Australian Financial Services Licence (AFSL) ............................................................ 17
5.
REGULATION OF ESVCLP ACTIVITIES AND INVESTMENTS .................. 17
5.1
ESVCLP activities [s9-3(1)(f) to (k) VCA] ................................................................ 17
5.2
Eligible investment [s118-425 or 427and 428 ITAA97] .............................................. 17
5.3
Investments permitted by s9-3(f)(ii) or (iii) VCA ...................................................... 21
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5.4
Permitted loans [s9-10 VCA].................................................................................. 21
6.
MANAGING AN ESVCLP .................................................................. 22
6.1
General partner.................................................................................................... 22
6.2
Venture capital management partnerships (VCMPs) [s94D(3) ITAA36] ........................ 22
6.3
Reporting to the Board [Division 15 VCA] ................................................................ 22
6.4
Statement of expectation ...................................................................................... 23
7.
TAXATION [Sourced from the ATO].................................................. 23
7.1
Description .......................................................................................................... 23
7.2
Capital gains and losses ........................................................................................ 23
7.3
Income derived from eligible venture capital investment ........................................... 24
7.4
Gain or profit from disposal of eligible investments ................................................... 24
7.5
Carried interest .................................................................................................... 24
8.
MONITORING AND SANCTIONS ....................................................... 25
8.1
Powers to direct ................................................................................................... 25
8.2
Powers to monitor ................................................................................................ 25
8.3
Annual report....................................................................................................... 25
9.
GLOSSARY OF TERMS .................................................................... 26
10.
LISTING OF RELEVANT LEGISLATIVE PROVISIONS ............................ 28
11.
FOR MORE INFORMATION............................................................... 31
ESVCLP Customer Information Guide – April 2015
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This Guide is to assist customers in understanding the requirements of Early Stage
Venture Capital Limited Partnerships (ESVCLP).
Applications for ESVCLP registration must be made on the approved application form
(available from AusIndustry) and can be lodged at any time. Applicants are encouraged to
first discuss their application with AusIndustry and draft applications can be submitted for
comment. Upon applying for registration, AusIndustry will provide guidance on the
application process and, if successful, support throughout the life of the fund.
Innovation Australia (the Board) notes that certain provisions of the Venture Capital Act
2002 make reference to "in the form approved by Innovation Australia". Listed are those
provisions and a description of the form approved by the Board.
1.
EARLY STAGE VENTURE CAPITAL LIMITED
PARTNERSHIPS (ESVCLP) OVERVIEW
The programme is aimed at stimulating Australia's venture capital sector by helping fund
managers attract capital. Fund managers planning to raise an early stage venture capital
fund of between $10 million and $100 million that pools investors’ capital can apply to
Innovation Australia to register the fund as an ESVCLP. An ESVCLP is entitled to
flow-through tax treatment (it is not a taxing point) and its investors pay no tax on their
share of returns (capital or income) when an ESVCLP disposes of an eligible investment.
However, an investor's share of a loss arising from the disposal of an eligible investment is
not deductible.
Broadly an eligible investment is the acquisition of new shares or units in an eligible
Australian business (property development and finance are excluded) with total assets of not
more than $50 million. An ESVCLP must dispose of an investment if the investee grows to
have more than $250 million in total assets.
The programme is enabled by the:

Venture Capital Act 2002 (VCA); and

Income Tax Assessment Act 1936 and 1997 (ITAA36 or ITAA97).
The programme commenced on 21 June 2007 when the Tax Laws Amendment (2007
Measures No.2) Bill 2007, which amended the VCA and both the ITAA36 and the ITAA97,
received Royal Assent.
The programme is jointly administered by the Board with the support of AusIndustry, and
the Australian Taxation Office (ATO).
2.
REGISTRATION AS AN ESVCLP
2.1
Innovation Australia
The Board administers the programme and decides registration applications. The Board is
supported by AusIndustry, a division of the Department of Industry and Science.
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2.2
Eligibility criteria [Divisions 9, 11 and 13 VCA]
To be eligible for registration as an ESVCLP a venture capital fund must:
Eligibility criteria
VCA reference

be a limited partnership*
s9-3(1),

be established in Australia or a country with which
Australia has a double tax agreement.
s9-3(1)(a)(i) or (ii)
*Limited partnerships are established under State laws. Most States allow for
the establishment of incorporated limited partnerships for the purpose of
registering as an ESVCLP.

have a partnership agreement that:
s9-3(1)(c),
s11-1(2)(f)
o
remains in existence for not less than five years
and not more than 15 years
o
requires partners to contribute capital when
required
o
prohibits the addition of new partners except as
provided for in the agreement
o
prohibits increases in committed capital except as
provided for in the agreement
o
confers on a general partner the right to require
partners to contribute their committed capital to
the partnership
o
includes a plan which outlines its intended
investment activities*.
*This plan must be part of the partnership agreement and if a fund is
registered this becomes the approved investment plan, see section 3.

have a general partner(s) that:
ESVCLP Customer Information Guide – April 2015
s9-3(1)(b),
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Eligibility criteria

VCA reference
o
is a resident of either Australia or a country which
Australia has a double tax agreement
o
has access to appropriate venture capital
management expertise.
have a plan to make early stage venture capital
investments*
s13-1(1A)(d)
s11-1(2)(f)(v),
s13-20
*This plan must be part of the partnership agreement and if the fund is
registered this becomes the approved investment plan, see section 3.

have at least $10 million* and not more than
$100 million committed capital.
s9-3(1)(d)
*A fund that does not satisfy the minimum capital requirement may be
eligible for conditional registration, see section 2.5.1

not have any partner (investor) contribute more than 30
per cent of the fund’s committed capital unless approved
by the Board*. Banks, life offices and widely held
superfunds are exempt from this restriction.
s9-3(1)(e),
s9-3(4), s9-4
* See section 4.2

not form part of a larger fund (i.e. it must be standalone).
s13-20(h) and (i)

not hold any investments.
s9-3(f) and (g)
2.3
Applying for registration
[Division 11 VCA]
Applications for ESVCLP registration must be made on the approved application form
(available from AusIndustry) and can be lodged at any time. Applicants are encouraged to
first discuss their application with AusIndustry and draft applications can be submitted for
comment.
Summary
VCA reference
Must use approved application form. (email
venturecapital@industry.gov.au or call 13 28 46 for a form)
s11-1(1)
Can be lodged anytime, free of charge.
s11-1(1)
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Summary
VCA reference
Must include partners details, eligible partnership agreement
(including investment plan), offer documents, evidence of
committed capital.
s11-1(2)
The Board can request additional information.
s11-10
Can be lodged electronically via venturecapital@industry.gov.au
Draft applications are encouraged and can be submitted for
comment.
2.4
Granting Registration
[Division 9, 11 and 13 VCA]
The Board will grant registration if it considers the application satisfies the legislative
requirements. Generally, if the Board is satisfied that the general partner has the skills to
operate an early stage venture capital fund, access to deal flow, capital and has an
investment plan with an early stage focus then registration can be granted.
Registration
VCA reference
The Board has 60 days to decide (can be extended by a further 60
days).
s11-15
Registration may be granted if the Board is satisfied the fund:
s9-3, 13-20,

is an eligible limited partnership [see section 2.2]

has an appropriate investment plan [see section 3]

has access to the management expertise to implement its
investment plan.
ESVCLP Customer Information Guide – April 2015
s13-1(1A)(d)
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2.5
Registration
2.5.1
Conditional Registration [s13-5(1A) VCA]
A fund that does not meet the requirements under s9-3 of the VCA, having at least
$10 million committed capital may be granted conditional registration. A fund that has
been conditionally registered must present sufficient evidence to satisfy the Board that it is
likely to raise at least $10 million and gain full registration within 24 months. Conditional
registration lapses after 24 months.
A conditionally registered ESVCLP may in certain circumstances make investments.
However, the ESVCLP must gain full registration before it realises any gains for the tax
exemption to apply. To gain full registration a further application that demonstrates the
fund meets all requirements for registration must be submitted to the Board. An application
for full registration can be lodged with the Board at any time during the conditional
registration period. However, it should be lodged no later than 60 days before the
expiration of the conditional registration.
A conditionally registered ESVCLP that has its conditional registration lapse is not
prevented from reapplying for registration. However, any application would need to
address, to the Board's satisfaction, those matters which prevented the fund gaining full
registration.
2.5.2
Full Registration
[s13-1(1A) VCA]
A fund that meets the ESVCLP registration requirements can apply for full registration at
any time on the approved form which is available from AusIndustry.
2.6
When registration is in force
[s13-1, s13-5 and s13-10 VCA]
Generally registration comes into force on the day the Board grants full registration (under
s13-1(1A). However, if an ESVCLP is conditionally registered (under s13-5(1A)) when the
Board grants full registration then its full registration, for the purposes of ITAA97 (i.e. the
tax concession), is taken to have come into effect on the day that it was granted conditional
registration, and for the purposes of the ITAA36 (i.e. the flow-through treatment) on the day
it (the partnership) was established.
2.7
Maintaining registration
[Division 9 VCA]
ESVCLP registration is subject to a number of ongoing requirements. The legislation refers
to them as:

investment registration requirements;

other registration requirements; and

divestiture registration requirements.
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It is also a condition of registration that an ESVCLP meet its reporting requirements.
Investment registration requirements s17-1(1)(ab)
VCA reference
Any of the following constitute a failure to meet the investment
registration requirements:

a limited partner (and associates) provides more than 30 per
cent of a fund's committed capital without the Board's prior
approval, widely held superfunds, banks, or life offices are
exempt [see section 4.2]
s9-3(1)(e)

an ESVCLP holds an investment that is either not permitted
under the legislation or does not accord with its approved
investment plan
s9-3(1)(f) and (g)

an ESVCLP carries on activities other than those related to
either making eligible investments or activities not in
accordance with its approved investment plan
s9-3(1)(j)

an ESVCLP carries on activities other than those related to
either making eligible investments or activities not in
accordance with its approved investment plan
s9-10

an ESVCLP holds a debt interest that is not a permitted loan.
Note: If the Board is satisfied there is a failure to meet an investment registration
requirement it will notify the ESVCLP in writing that it must remedy the failure
within a reasonable period, but not exceeding six months. If the failure is not
remedied within the stipulated period the Board must revoke the ESVCLP's
registration. This is a reviewable decision under Division 29 of the VCA.
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Other registration requirements s17-5(1)(ab)
VCA reference
Any of the following constitute a failure to meet the other registration
requirements:

the ESVCLP is no longer a partnership that satisfies the
eligibility requirements of the VCA
s9-3(1)(a),(b),(c)

the ESVCLP has committed capital of less than $10 million or
more than $100 million.
s9-3(1)(d)
Note: If the Board is satisfied an ESVCLP has failed to meet one of the above
requirements it will advise the ESVCLP it has 60 days in which to remedy the
contravention. An ESVCLP can apply to have this extended by a further 60 days. If
the contravention is not remedied within the period set by the Board registration
must be revoked. A decision to revoke under this provision is reviewable under
Division 29 of the VCA.
Divestiture registration requirement s17-3
VCA reference
Holding an investment in a business with more than $250 million total
assets constitutes a failure to meet the divestiture registration
requirement.
s9-3(1)(i), s9-3(6)
Note: Once an investee's value exceeds $250 million an ESVCLP must dispose of
the investment within six months of the end of the ESVCLP's income year in which
the limit was exceeded [s17-3]. An ESVCLP may apply under s17-3(3) to the Board
to extend this period by up to three months. If the investment is not disposed of
within the required period the Board must revoke the ESVCLP's registration. A
decision to revoke under this provision is not reviewable.
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Reporting requirements Division 15, s17-10
VCA reference
Failure to meet the following reporting requirements of Division 15
allows the Board to revoke registration under s17-10.

Quarterly returns* submitted within one month of the end of
each quarter

Annual return* submitted within three months of the end of the
financial year

Annual report* on the funds success in implementing its
approved investment plan submitted within three months of the
end of the financial year.
Note: A decision to revoke under this provision is reviewable under Division 29 of
the VCA.
*AusIndustry has a pro forma for each report which will be emailed to the general
partner at the appropriate time.
2.8
Revoking registration
[Division 17 VCA]
The Board may revoke an ESVCLP registration:

for failing an 'investment registration requirement' [see section 2.7]

for failing a 'divestiture registration requirement' [see section 2.7]

for failing any 'other registration requirements' [see section 2.7]

at its discretion (see below)

at the fund manager’s request.
Revocation at the Board's discretion s17-10
VCA reference
The Board may revoke registration for:
s15-1,10,15,17,
20


failing to submit required reports or provide requested
information
repeated breaches in relation to the holding of ineligible
investments.
ESVCLP Customer Information Guide – April 2015
s17-10(e)
s9-3(1)(f)and (g)
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Revocation at the Board's discretion s17-10
VCA reference
Note: A decision to revoke under s17-10 is reviewable under Division 29 of the VCA.
Application by the fund manager
VCA reference
An application for revocation may be lodged at any time and the Board
will revoke registration as soon as practicable.
s17-25
Generally if the Board considers an ESVCLP does not meet any of the above registration
requirements it must issue a notice advising the ESVCLP and inviting a response. If after
considering the response the Board is satisfied there is a contravention it will direct the
ESVCLP to rectify the contravention within a period determined in accordance with the
VCA. If the contravention is not remedied within the set period the Board must revoke the
ESVCLP's registration.
2.9
Review of a decision
[Division 29 VCA]
Division 29 sets out those Board decisions that are reviewable. Under this Division an
ESVCLP may ask the Board to review certain decisions. If the Board confirms its decision
the ESVCLP may then apply to the Administrative Appeals Tribunal to review the decision.
The following are reviewable under the VCA. Decisions under:

section 9-4 refusing to allow a partner’s (investor's) committed capital in an
ESVCLP to exceed 30 per cent of the ESVCLP’s committed capital

subsection 9-10(3) allowing, or refusing to allow, a longer period for the purposes of
paragraph 9-10(1)(b) for repayment by an investee to the ESVCLP of a permitted
loan

section 13-1 refusing to register a limited partnership as an ESVCLP

section 13-5 refusing to conditionally register a limited partnership as an ESVCLP

section 17-1, 17-5 or 17-10 revoking a registration under Part 2

subsection 17-1(2) determining a period within which investment registration
requirements must be met

section 25-5 determining a shorter period, or refusing to make such a determination
(relates to the Australian nexus test for a company s118-425 or a unit trust s118427(3) ITAA97)

section 25-10 refusing to make a determination. (relates to the Australian nexus test
for a company s118-425 or a unit trust s118-427(3) ITAA97)
ESVCLP Customer Information Guide – April 2015
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
3.
section 25-15 refusing to make a determination. (relates to a company’s primary
activity s118-425(3) and (13) or a unit trust’s primary activity s118-427(4) and (14)
ITAA97).
APPROVED INVESTMENT PLAN
Note: It is a requirement of registration that an ESVCLP operates in accordance with its approved investment
plan.
3.1
Approving an investment plan
[s13-20 VCA]
The Board will approve an investment plan if it considers it is appropriate. The Board must
take into account the extent to which the plan focuses on early stage venture capital, having
regard to the requirements set out in the VCA. These are the proposed investee entities:

stages of development

cash flow levels

levels of technology

proportion of intellectual property to total assets

levels of risk and return

amount of tangible assets and collateral against which borrowings may be secured.
The Board will also take into account:

offer documents

the legislative requirements for an ESVCLP making and holding investments

whether the committed capital requirements of an ESVCLP will be met

any additional matters specified in guidelines issued by the Board. (NB - no
guidelines have been issued to date)
The Board is not limited to the above matters in deciding if it considers an investment plan
is appropriate. Generally the Board, in the context of this programme, considers early stage
to be a description of venture capital, which includes investment in businesses at the preseed, seed, start-up, and early expansion stage of development.
3.2
Variation of an approved investment plan
[s13-15 VCA]
An ESVCLP can ask the Board to approve a new investment plan as a replacement for its
approved investment plan. A request must state why the ESVCLP wants the plan replaced.
If the Board is satisfied the replacement plan is appropriate it will approve the replacement
plan. That plan then becomes the ESVCLP's approved investment plan. As the approved
investment plan is included in the partnership agreement, that agreement must also be
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amended. If the Board does not consider the replacement plan appropriate it will refuse the
request and provide a written notice including a statement of reasons for its decision. The
decision is not reviewable.
3.3
Operate in accordance with an approved investment plan
[s9-3(1)(g),(h) VCA]
It is a requirement that an ESVCLP operates in accordance with its approved investment
plan. Failure to do so is a contravention of the investment registration requirements and
will result in the Board commencing proceedings to revoke the ESVCLP's registration.
3.4
plan
Reporting on implementation of an approved investment
[s15-17 VCA]
An ESVCLP must report within three months after the end of each financial year on the
implementation of its approved investment plan. The report must include descriptions of
investments and disposals the ESVCLP made during the year. It should be noted that the
Board is required to publish reports in Innovation Australia's annual report.
4.
CAPITAL RAISING AND FUND SIZE
4.1
VCA]
Minimum and maximum size [s9-3(1)(d), (4) and (5),
To be eligible for ESVCLP registration a fund must have at least $10 million in committed
capital and not more than $100 million committed capital. This requirement is ongoing and
if a fund is granted ESVCLP registration it becomes a condition of registration.
Note: Conditional registration can be granted to a fund that has yet to raise capital [see section 2.5.1].
4.2
Limit on amount an investor can contribute
[9-3(1)(e), 9-
3(4),(5), (9-4) VCA]
An investor (limited partner) cannot contribute more than 30 per cent of an ESVCLP's
committed capital unless the Board otherwise approves. Banks, life insurance companies
and widely-held complying superannuation funds are exempt from this restriction.
An investor in an ESVCLP can apply to the Board under Division 9-4 of the VCA for its
committed capital to exceed 30 per cent of the ESVCLP's committed capital. A Board
decision to refuse the application is reviewable under Division 29 of the VCA.
The Board may, by legislative instrument, make principles about making decisions. Any
legislative instruments will be published on the website on the ESVCLP programme page.
4.3
Committed capital
[s118-445 ITAA97]
Section 118-445 of the ITAA97 defines committed capital. In order to maintain ESVCLP
registration a fund must have at least $10 million and not more than $100 million
committed capital, a partner cannot contribute more than 30 per cent of an ESVCLP's
ESVCLP Customer Information Guide – April 2015
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committed capital [see section 4.2] and an investment cannot represent more than 30 per
cent of an ESVCLP's committed capital.
4.4
Australian Financial Services Licence (AFSL)
Please visit the ASIC website to determine whether your proposed ESVCLP structure
requires an AFSL under the Corporations Act 2001.
5.
REGULATION OF ESVCLP ACTIVITIES AND
INVESTMENTS
5.1
ESVCLP activities
[s9-3(1)(f) to (k) VCA]
An ESVCLP can only carry on the business of being an ESVCLP (i.e. being a venture
capital fund) and can only hold investments as provided for under the VCA.
Investments must accord with an ESVCLP’s approved investment plan and they must be
either;

an eligible venture capital investment

permitted by s9-3(f)(ii) or (iii) VCA

a debt interest that is a permitted loan.
5.2
Eligible investment [s118-425 or 427and 428 ITAA97]
For an ESVCLP an eligible venture capital investment is one that satisfies either the
requirements of s118-425 (investment in a company) or s118- 427 (investment in a unit
trust) and s118-428 (additional investment requirements for ESVCLP's) of the ITAA97.
The requirements may apply at the time the investment is made, or for a certain period after
the investment being made, or may be ongoing.
An ESVCLP cannot invest in an entity which exceeds the permitted entity value (total
assets of $50 million - s118-440 of the ITAA97). That is the ESVCLP should not invest
until it has established that the entity does not have total assets of more than $50 million.
The entity in which the investment is made is required to appoint an auditor in the year
which the investment is made. The value of the entity value must not exceed the
$50 million threshold and is represented by reference to audited accounts which is not more
than 18 months old or if no accounts exist (as may be the case for startups) a statement
prepared in accordance with the accounting standards prepared by the auditor. It should be
noted that this requirement does not necessarily require a full audit on a startup’s
operations. It is only required to establish the total assets of an entity and that the entity
does not exceed the $50 million threshold.
Below is an overview and this should be read in conjunction with the relevant tax
provisions.
ESVCLP Customer Information Guide – April 2015
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Eligible Investment
Requirements
ITAA97 reference
At time of investment and for
at least 12 months after
s118-425(2),
An investment in a business that:




is located in Australia
o
50 per cent of assets
o
50 per cent of staff
s118-427(3)
(Board can approve variation see
section 5.2.7)
is either a company or a unit
trust
At time of investment and
ongoing
has total assets not more than
$50 million
At time of investment
has a registered auditor
By the end of the year of the
initial investment
s118-425(1)(b),
s118-427(1)(b)
s118-440,
s118-440(9)(a)
s118-425(5),
s118-427(6)



has a predominant activity
that is not property
development or land
ownership, finance,
insurance, construction,
making investments directed
at deriving passive income
At time and ongoing (Board has
some discretion see 5.2.7)
s118-425(3),(4),(13)
s118-427(4),(5),(14)
does not invest the
ESVCLP's investment in
another entity (there are
exceptions)
Ongoing
s118-425(4),(11)
not listed – there are
exceptions in cases where an
ESVCLP invested prior to
listing.
At time and ongoing
s118-427(5)
ESVCLP Customer Information Guide – April 2015
s118-428(1)(a)
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The investment must also be:
Requirements
ITAA97 reference

At time and ongoing
s118-425(1)(a),
at risk
s118-427(1)(a),
s118-430

new shares or units; or
options to acquire shares or
units or convertible notes
(that are not debt interests) – in
At time
s118-428
s118-425(1)(b)
s118-427(1)(b)
certain circumstance pre-owned
shares or units are allowed, see
section 5.2.1

the total amount invested is At time
not more than 30 per cent of
the ESVCLP's committed
capital
s118-425(1)(d)

held by the ESVCLP for at
least 12 months
s118-407(1)(d)(ii)

made and disposed of while
registered as an ESVCLP.
s118-407(1)
s118-427(1)(d)
The following can also qualify as eligible venture capital investments:
5.2.1
ITAA97]
Pre-owned shares or units [s118-428(1)(b) and (c), s118-428(2)
An ESVCLP may acquire pre-owned shares or units in an eligible business if the ESVCLP
already holds an eligible venture capital investment in that business, or is acquiring an
eligible venture capital investment at the same time. The total value* of an ESVCLP's
investment in pre-owned shares or units cannot exceed 20 per cent of the ESVCLP's
committed capital.
*Value is defined at s118-428(3) of the ITAA97
5.2.2
Listed shares or units
[s118-428(1) ITAA97]
An ESVCLP can only acquire shares or units in a listed business if the ESVCLP made and
holds an eligible venture capital investment in the businesses before it was listed.
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5.2.3
ITAA97]
Convertible notes [s118-425(1)(b)(iii) and s118-425(9) and (15)
Convertible notes, other than convertible notes that are debt interests, qualify as an eligible
venture capital investment. If the convertible note is a debt interest it is not an eligible
venture capital investment but may be acquired if it qualifies as a permitted loan under s910 of the VCA (see section 5.4).
Note: Division 974 of the ITAA97 sets out the tests for determining whether an interest is debt or equity.
5.2.4
Investments through holding companies
[s118-425(11) ITAA97]
An ESVCLP can make investments through a holding company. However, the holding
company must have been formed solely for the purpose of investing in another company or
unit trust and must make the investment within six months. The investment the holding
company makes must be an eligible venture capital investment.
It should be noted the ATO has advised that generally the provision allowing investment
though a holding company can only be applied once. That is it usually does not allow for
an investment to be channelled through multiple holding companies. Please contact the
ATO for guidance on the general application of the law, or, if you would like information
about how the law will apply to your specific circumstances, you may like to consider
applying for a private binding ruling.
5.2.5
Investments in foreign resident holding companies
[s118-435 ITAA97]
Where an investee (holding) company meets the ‘permitted entity value’ and listing
requirements, it will be treated as meeting the other eligible venture capital investment
requirements (such as residency, activity and auditor requirements) if the investee (holding)
company:

is a resident of Canada, France, Germany, Japan, the United Kingdom or the United
States of America

beneficially owns all the shares in an Australian resident company (subsidiary) or all
of the units in a unit trust, which satisfies the requirements of an eligible venture
capital investment

the investee (holding) company does not carry on any business other than to support
the primary activity of the subsidiary company or trust.
However, if the subsidiary company ceases to be an Australian resident or the subsidiary
trust ceases to carry on business in Australia at any time within 12 months after the day the
first eligible venture capital investment in the holding company was made, then the
investment in the holding company will cease to be an eligible venture capital investment
and any further investments made in the company will not be eligible for exemption.
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5.2.6
Exception to location within Australia
[s118-425(12A) and s118-427(13) ITAA97]
An ESVCLP can invest up to 20 per cent of its committed capital in investments that would
be eligible venture capital investments except for not meeting the Australian location test
for companies [s118-425(2)] or unit trusts [s118-427(3)]. These investments are treated as
eligible venture capital investments.
5.2.7
The Board's discretionary powers
[Division 25 VCA]
The Board can make determinations and relax some of the requirements that relate to an
eligible venture capital investment, specifically sections 118-425(2)(b), (3), (13),
s118-427(3)(c), (4) (15) of the ITAA97. These provisions relate to how closely an investee
must be connected with Australia for it to be an eligible investment and its predominant
activity. Generally an investee must have more than 50 per cent of its operations
undertaken in Australia at the time of an investment and for at least 12 months after. It
must also have an eligible predominant activity. The Board may, upon application by an
ESVCLP, relax these requirements. An application must be made in the approved form
which is specified on the ESVCLP webpage.
5.2.8
Scrip for scrip investments
[s118-245(8), s118-427(9) ITAA97]
Where shares in another company are acquired in exchange for shares that at the time of
disposal were an eligible venture capital investment (i.e. a scrip for scrip exchange), the
replacement shares will be treated as an eligible venture capital investment even if the
company does not satisfy the requirements. However, if the company in which the
replacement shares are held does not actually satisfy the requirements for a venture capital
investee company, any shares acquired from a further scrip for scrip sale will not be treated
as an eligible venture capital investment.
The replacement shares acquired under a scrip for scrip sale will only qualify as an eligible
venture capital investment if the ESVCLP, disposes of all of its shares in the original
investee company in return for shares in the other company.
5.3
Investments permitted by s9-3(f)(ii) or (iii) VCA
These investments do not qualify as eligible venture capital investments but can be held by
an ESVCLP. Returns from these investments are taxed in the hands of investors.
This provision allows an ESVCLP to make and hold follow-on investments in entities
where it already holds an eligible venture capital investment but that entity has grown
beyond the $50 million assets limit or no longer satisfies the Australian nexus test. Gains
from these investments are taxed in the hands of investors.
5.4
Permitted loans
[s9-10 VCA]
An ESVCLP can only hold a debt interest if it is a permitted loan as defined at s9-10 of the
VCA. Generally an ESVCLP can lend money to a company or unit trust once it holds an
eligible venture capital investment in that entity and that investment is at least 10 per cent of
the investee.
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An ESVCLP may also lend money to a business where it does not hold an investment if the
loan is repaid within six months. If there are exceptional circumstances the repayment
period may be extended by the Board [s9-10(1)(b), (2) and (3)].
Note: Division 974 of the ITAA97 sets out the tests for determining whether an interest is debt or equity.
6.
MANAGING AN ESVCLP
6.1
General partner
The general partner is responsible for managing the operation of an ESVCLP. Specifically
it is the body that is responsible for ensuring the ESVCLP holds only permitted investments
and operates in accordance with the relevant legislation. The general partner should be a
management team that consists of individuals with skills and experience relevant to
managing an early stage venture capital fund. The general partner should also have access
to deal flow and capital.
6.2
Venture capital management partnerships (VCMPs)
[s94D(3) ITAA36]
A venture capital management partnership is a limited partnership that:


is a general partner of one or more the following:
o
one or more ESVCLPs
o
one or more venture capital limited partnerships (VCLPs)
o
one or more Australian venture capital fund of funds (AFOF)
only carries on activities that are related to being such general partner.
A limited partnership ceases to be a venture capital management partnership if it ceases to
meet these requirements.
The general partner of an ESVCLP or a limited partner in a VCMP, who becomes entitled
to receive a payment of a ‘carried interest’, may have that payment taxed as a capital gain
(subject to concessional taxation). For the carried interest to qualify as a discount capital
gain, the general partner must have entered into the partnership agreement under which the
gain arose at least 12 months previously, and must meet the other requirements for the
discount.
6.3
Reporting to the Board
[Division 15 VCA]
An ESVCLP must report on its activities within one month of the end of each quarter. It
must also provide an annual report within three months of the end of the financial year and
report to the Board annually on its progress in implementing its approved investment plan.
The Board will monitor compliance through examining relevant documents including both
an ESVCLP's quarterly and annual returns. The Board may also ask for additional
ESVCLP Customer Information Guide – April 2015
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information it considers necessary for the purposes of administering the programme.
Compliance assessments are also undertaken by the ATO, which receives copies of all
ESVCLP reports submitted to the Board. The ATO may undertake risk assessment
activities to ensure compliance with the legislation under its administration. The Australian
tax system works on self-assessment.
6.4
Statement of expectation
The Board has issued a statement of expectation which has been published on the ESVCLP
programme page on the website. The statement outlines what the Board expects from an
ESVCLP.
7.
TAXATION [Sourced from the ATO]
7.1
Description
The programme tax benefits operate in the following way:

treating ESVCLPs as ordinary partnerships, or ‘flow-through’ vehicles, for tax
purposes

exempting all partners of an ESVCLP from tax on their share of the income and
gains derived from, or from disposal of, eligible early stage venture capital
investments.
7.2
Capital gains and losses
A partner’s share of capital gains and losses arising in relation to an eligible venture capital
investment is exempt from income tax if the following conditions are met:

the entity is a partner in a limited partnership, that was unconditionally registered as
an ESVCLP when it made the investment

if the partner is a general partner, the general partner is either an Australian resident
or a resident of a foreign country in respect of which a double tax agreement (as
defined in Part X of the ITAA36) with Australia is in force

the Capital Gains Tax (CGT) event relates to an eligible venture capital investment
that met all of the additional investment requirements for investments by ESVCLPs

at the time of the CGT event, the ESVCLP:
o
owned the investment and had done so for at least 12 months
o
was unconditionally registered
ESVCLP Customer Information Guide – April 2015
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o
7.3
satisfied the registration requirements of an ESVCLP under the VCA, other
than the investment registration requirements, but including the divestiture
registration requirements.
Income derived from eligible venture capital investment
A tax exemption is also provided for an entity’s share of any income derived from an
eligible venture capital investment, such as a dividend, if the following conditions are
satisfied:

the entity is a partner in a limited partnership that was unconditionally registered as
an ESVCLP when it made the investment

if the partner is a general partner, the general partner is either an Australian resident
or a resident of a foreign country in respect of which a double tax agreement (as
defined in Part X of the ITAA36) with Australia is in force

when the income was derived the ESVCLP owned the investment and was
unconditionally registered.
There is no exemption from income tax to the extent that the income is a payment of a
‘carried interest’ of a general partner in an ESVCLP.
7.4
Gain or profit from disposal of eligible investments
An entity’s share of any gain or profit made from the disposal or other realisation of an
eligible venture capital investment is exempt from income tax if:

it is made by an ESVCLP that is unconditionally registered

would be eligible for the above exemption in relation to capital gains if the disposal
or realisation was a CGT event.
A partner’s share of a loss arising from the disposal of an eligible venture capital investment
by an ESVCLP is not deductible.
7.5
Carried interest
The general partner of an ESVCLP or a limited partner in a VCMP (see section 6.2), who
becomes entitled to receive a payment of a ‘carried interest’ will have that payment taxed as
a capital gain. For the carried interest to qualify as a discount capital gain, the general
partner must have entered into the partnership agreement under which the gain arose at least
12 months previously, and must meet the other requirements for the discount.
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8.
MONITORING AND SANCTIONS
8.1
Powers to direct
If the Board is satisfied that an ESVCLP has contravened the VCA it must direct the
ESVCLP to remedy the contravention within a period of time. The period will depend on
the nature of the contravention [see section 2.7]. The Board must revoke the registration of
an ESVCLP that fails to remedy a contravention.
8.2
Powers to monitor
The Board is required to monitor ESVCLP activities to ensure they continue to operate in
accordance with the relevant legislation and meet the registration requirements of an
ESVCLP. This is generally undertaken through reviewing ESVCLP reports (quarterly and
annual). Copies of these reports are routinely provided to the ATO.
8.3
Annual report
The Board reports annually on the ESVCLP programme. The report is included in
Innovation Australia's annual report to the Minister for Industry and Science.
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9.
GLOSSARY OF TERMS
Summary
Term
ADI
Authorised deposit taking institution
Approved investment plan
A plan approved by the Board under
s13-20 of the VCA
Associate
Section 995-1 ITAA97
At risk
Section 118-430 ITAA97
Committed capital
Section 118-445 ITAA97
Conditional registration
Registration granted under s13-5(1A) of the
VCA
Debt interest
Division 974 of the ITAA97 sets out the tests
for determining whether an interest is debt or
equity
Divestiture registration
requirement
Section 9-3(3) of the VCA
Double tax agreements
See ATO site
Eligible venture capital
investment
Sections 118-425, 118-427, 118-428 of the
ITAA97
Equity interest
Division 974 of the ITAA97 sets out the tests
for determining whether an interest is debt or
equity
ESVCLP
Early Stage Venture Capital Limited
Partnership registered under Part 2 of the VCA
Full registration
Registration under s13-1(1A) of the VCA
General partner
A partnership’s manager, responsible for
identifying and making investments, and whose
liability is not limited
Incorporated limited partnership
A separate legal entity, that may sue or be sued
in its firm-name – these are special purpose
designed for use as venture capital funds under
both the ESVCLP and VCLP programmes.
Innovation Australia
A body established under the IR&D Act 1986
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Summary
Term
Investment registration
requirement
Section 9-3(2) of the VCA
ITAA 36 or 97
The Income Tax Assessment Act 1936 or 1997
Predominant activity
Section 118-425(3), s118-427(4) of ITAA97
The Board
Innovation Australia
VCA
The Venture Capital Act 2002
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10.
LISTING OF RELEVANT LEGISLATIVE
PROVISIONS
Venture Capital Act 2002
Part 1—Preliminary
Division 1—Preliminary
1-1
Short title [see Note 1]
1-5
Commencement [see Note 1]
1-10
Interpretation
1-15
Identifying defined terms
Division 3—A guide to this Act
3-1
What this Act is about
3-5
Registration of limited partnerships (Part 2)
3-10
Registration of eligible venture capital investors (Part 3)
3-15
Determinations by Innovation Australia concerning certain investments (Part 4)
3-20
Review of decisions (Part 5)
3-25
Miscellaneous (Part 6)
Part 2—Registration of limited partnerships
Division 7—A guide to this Part
7-1
What this Part is about
Division 9—Registration requirements
9-1
Registration requirements of VCLPs
9-3
Registration requirements of ESVCLPs
9-4
Allowing a partner’s committed capital to exceed the 30 per cent limit
9-5
Registration requirements of AFOFs
9-10
Meaning of permitted loan
Division 11—Application for registration
11-1
Application for registration
11-5
Determination of further information to be included in application
11-10
Further information may be requested
11-15
Period within which application must be decided
Division 13—Registration
13-1
Registration
13-5
Conditional registration
13-10
When registration is in force
13-15
An ESVCLP’s approved investment plan
13-20
Deciding whether investment plans are appropriate
Division 15—Obligations while registered
15-1
Annual return
ESVCLP Customer Information Guide – April 2015
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15-5
Determination of further information to be included in returns
15-10
Quarterly returns
15-15
Further information may be requested
15-17
Annual reports for ESVCLPs
15-20
Other information may be requested
Division 17—Revocation of registration
17-1
Revoking registration for not meeting investment registration requirements etc.
17-3
Revoking registration of ESVCLPs for not meeting divestiture registration requirement
17-5
Revoking registration for not meeting other registration requirements
17-10
Revocation at discretion of Innovation Australia
17-15
Notice of revocation
17-20
Date of effect of revocation
17-25
Revocation on application by partnership
Part 3—Registration of eligible venture capital investors
Division 21—Registration of eligible venture capital investors
Guide to Division 21
21-1
What this Division is about
Operative provisions
21-5
Registration as eligible venture capital investors
21-10
Period within which application must be decided
21-15
When registration is in force
21-20
Annual return by eligible entity
21-25
Revocation at discretion of Innovation Australia
21-30
Revocation on application
Part 4—Determinations by Innovation Australia concerning certain investments
Division 25—Determinations by Innovation Australia concerning certain investments
Guide to Division 25
25-1
What this Division is about
Operative provisions
25-5
Innovation Australia may determine a shorter period
25-10
Innovation Australia may determine that a requirement does not apply
25-15
Innovation Australia may determine that a requirement does not apply
Part 5—Review of decisions
Division 29—Review of decisions
29-1
Decisions reviewed
29-5
Notification of right to seek internal review
29-10
Internal review of decisions
29-15
Review of decisions by Administrative Appeals Tribunal
Part 6—Miscellaneous
ESVCLP Customer Information Guide – April 2015
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Division 33—Miscellaneous
33-5
Meaning of form approved by Innovation Australia
33-10
Regulations
Notes
Income Tax Assessment Act 1997
Subdivision 118-F venture capital investments
118-405 Exemption for certain foreign venture capital investments through venture capital limited
partnerships
118-407 Exemption for certain venture capital investments through early stage venture capital limited
partnerships
118-410 Exemption for certain foreign venture capital investments through Australian venture capital funds
of funds
118-415 Exemption for certain venture capital investments by foreign residents
118-420 Meaning of eligible venture capital partner etc.
118-425 Meaning of eligible venture capital investment—investments in companies
118-427 Meaning of eligible venture capital investment—investments in unit trusts
118-428 Additional investment requirements for ESVCLPs
118-430 Meaning of at risk
118-435 Special rule relating to investment in foreign resident holding companies
118-440 Meaning of permitted entity value
118-445 Meaning of committed capital
Other relevant provisions
4-10
How to work out how much income tax you must pay
11-15
Ordinary or statutory income which is exempt only if it is derived by certain entities
26-68
Loss from disposal of eligible venture capital investments
36-25
Special rules about tax losses
51-52
Income derived from eligible venture capital investments by ESVCLPs
51-54
Gain or profit from disposal of eligible venture capital investments
104-255 Carried interests: CGT event K9
116-30 Market value substitution rule: modification 1
118-21 Carried interests
195-65 Tax losses cannot be transferred to a VCLP, an ESVCLP, an AFOF or a VCMP
195-70 Previous tax losses can be deducted after ceasing to be a VCLP, an ESVCLP, an AFOF or a VCMP
195-75 Determinations to take account of income years of less than 12 months
Debt and equity interests – Division 974
974-A General
974-B Debt interests
974-C Equity interests
974-D Common provisions
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974-E Non-share distributions by a company
974-F Related concepts
Income Tax Assessment Act 1936
Relevant provisions
6
Interpretation
18A
Accounting periods for VCLPs, ESVCLPs, AFOFs and VCMPs
92
Income and deductions of partner
92A
Deductions in respect of outstanding subsection 92(2AA) amounts
94D
Corporate limited partnerships
128B
Liability to withholding tax
318
Associates
11.
FOR MORE INFORMATION
Further information on the ESVCLP programme is available from the website:
Email: venturecapital@industry.gov.au
Web: Business.gov.au
Phone: 13 28 46
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